Should Uncle Sam Control Your Health Insurance?

Commentary by John C Goodman

Most people think the next four years on Capitol Hill will be relatively uneventful, as Republicans reach an accommodation with a lame duck president. I predict that in the area of health care things will not be peaceful, however.

We have yet to take needed action to reign in the spiraling costs of Medicare and Medicaid. The growing number of uninsured will contribute to the pressure on Congress to find ways to insure them. And a new health policy issue has come center stage: The role of the federal government in regulating private health insurance.

Without any hearings and virtually no serious debate in the closing days of the 104th session, Congress passed two health insurance mandates: (1) a requirement that mothers be allowed to stay in the hospital for at least two days following well-baby delivery and (2) a requirement that any cap on mental health benefits not be lower than the cap on physical health benefits. These two measures will cost employers (and, therefore, employees and consumers) millions of dollars. They will impose on large, self-insured companies burdens that no state government has been able to impose because of federal exemptions. And they will cause more people to voluntarily choose to be uninsured.

The number of uninsured Americans has been steadily rising in recent years and now exceeds 40 million. One reason is that people perceive the cost of private insurance as excessive, relative to the expected benefits. Economists estimate that mandated health insurance benefits imposed by state governments have already increased premiums by 15 to 30 percent. If these benefits were something people really wanted, legislation would be unnecessary. Insurers would include them as part of the insurance package in order to attract more customers. However, the fact that these mandates are imposed rather than freely chosen in the marketplace suggests that the benefits are not worth their extra costs. When government forces insurers to sell bloated policies with all the bells and whistles and people are denied the opportunity to buy no-frills insurance at a lower price, it is inevitable that the number of uninsured will rise.

State governments have passed more than 1,100 mandates, proving their popularity with voters. Now that the door to federal mandates has been opened, we can expect special interests to descend on the nation's capitol: chiropractors, naturopaths, acupuncturists, in vitro fertilization centers, etc., will all want their services covered. We also can expect proposals that would be particularly appealing to women voters. Among likely candidates are:

  • The right to an overnight hospital stay for mastectomies
  • Regular mammograms with no deductible or co-payment
  • Regular pap smears with no deductible or co-payment
  • Check-ups for children with no deductible or co-payment

An additional reason why there will be pressure to pass more federal mandates is concern about quality. More than half of the nation's large employers have opted for managed care in order to control the costs of health care. Under managed care however, doctors are discouraged from performing expensive procedures or tests and from referring patients to specialists. In some cases, patients are denied necessary treatments because the insurance company, despite the doctor's recommendation, refuses to pay for them. Although cost-effective medicine is a desirable goal, managed care can create perverse incentives that threaten to lower the quality of care patients receive.

Yet, instead of more government regulations, there's a better way: Medical Savings Accounts (MSAs), under which people can choose a high deductible (say, $3000) and put the premium savings in an account from which to pay their own small medical bills. When patients are responsible for the first $3,000 of medical expenses, they can decide whether to pay for chiropractic care, group therapy and other mandated services from their MSA. Since they get to keep any MSA money they don't spend, they have ideal incentives to make wise choices. As long as the costs of their services remain under the deductible, the price of health insurance should be unaffected.

MSAs are also important in maintaining health care quality. When patients spend money from their MSA accounts, the doctor-patient relationship will be restored. Patients will have incentives to look for the most cost-effective health-care, and the doctor will once again be an agent of the patient and not of an impersonal bureaucracy. This will restore the incentive to provide cost-effective medicine, not cut corners to serve the HMO bureaucracy.

After years of bipartisan legislative proposals to create tax-free MSAs, Congress has now passed a law that includes a limited version of MSAs. A number of healthy Americans will have the opportunity to have tax-free MSAs beginning this month. Unfortunately, the MSA "demonstration project" is limited to four years and 750,000 policies. Also, only employers with 50 or fewer employees, along with the self-employed will be permitted to obtain a tax-free MSA.

By expanding the opportunity for more Americans to have MSAs and by avoiding the temptation to meddle in specifics of health insurance benefits, Congress can encourage more people to obtain insurance for higher quality, more cost-effective medical care.